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Hewlett-Packard Company’s (HPQ - Analyst Report) third-quarter 2013 non-GAAP earnings per share of 86 cents not only lagged the Zacks Consensus Estimate of 87 cents but were also down 14.0% on a year-over-year basis. However, the earnings came at the high point of management’s guided range of 84 cents to 87 cents.

Revenues

Hewlett-Packard’s revenues declined 8.0% from the year-ago quarter to $27.2 billion and missed the Zacks Consensus Estimate of $27.4 billion. The company witnessed a broad-based revenue decline across all its business segments.

Segmental Revenues

Personal Systems revenues slumped 11.0% year over year to $7.7 billion, primarily due to a decline in volumes in the PC market and weak consumer demand. Within this segment, Commercial revenues declined 3.0% and Consumer revenues declined 22.0%. Total units sold were down 8.0% compared to the year-ago quarter, while Desktops units and Notebook units were down 9.0% and 14.0%, respectively. The units sold were affected by soft demand environment in all its operating regions, especially EMEA.

Printing revenues declined 4.0% on a year-over-year to $5.8 billion. The company’s commercial hardware revenues declined 3.0% from the year-ago quarter due to unfavorable product mix. Consumer hardware revenues remained flat on a year-over-year basis primarily driven by higher Ink in the Office and Ink Advantage sales.

Despite the revenue declines, weak Yen allowed the company to ship more units. As a result, total hardware units increased 5.0% year over year, while the Commercial hardware units and Consumer hardware units were up 12.0% and 2.0% from the year-ago quarter, respectively.

Revenues from the Enterprise Group were down 9.0% from the year-ago quarter to $6.8 billion primarily due to execution challenges and competitive pricing across its segments. Apart from this, revenues from Hewlett-Packard’s Industry Standard Servers dropped 11.0%, while Business Critical Systems revenues slumped 26.0% from the year-ago quarter. Moreover, Storage revenues and Technology Services revenues were down 10.0% and 7.0%, respectively, on a year-over-year basis. However, Networking sales remained flat on a year-over-year basis.

The Enterprise Group segment recorded several customer wins during the quarter including Oriental DreamWorks, a joint venture between China Media Capital and DreamWorks Animations (DWA - Analyst Report), selected Hewlett-Packard as the technology partner.

Enterprise Services revenues were down 9.0% year over year to $5.8 billion, primarily due to lower IT spending in the U.S. and the U.K. Application and Business Services revenues declined 11.0% from the year-ago quarter while IT Outsourcing revenues was down 7.0%.

During the quarter, Enterprise Services segment recorded several contract wins, including a $3.4 billion contract from United States Department of the Navy spanning over five years.   

Software revenues inched up 1.0% year over year to $982.0 million primarily aided by cloud, security and big data. Support revenues were up 4.0%, while license revenues remained flat on a year-over-year basis. Professional services revenues were down 11.0% year over year but SaaS revenues were up 4%. Improved sales execution and solid license conversions were responsible for the revenue improvement.

HP Financial Services revenues declined 6.0% year over year to $879.0 million primarily due to volume declines in the Enterprise Services which more than offset the robust direct business growth. Hewlett-Packard recorded volume declines in the Financing while its net portfolio of assets declined 4.0% year over year to $12.0 billion.

Operating Results

Hewlett-Packard’s gross profit for the quarter declined 7.0% from the year-ago quarter to $6.37 billion due to lower revenues. However, favorable mix of software, printing and personal systems provided some cushion. Gross margin was 23.4% in the quarter versus 23.1% in the year-ago quarter.

The company reported non-GAAP operating expenses of $4.1 billion, which declined 4% year over year due to lower Research & Development investments and benefits from restructuring activities. However, as a percentage of revenues, operating expenses expanded 80 basis points (bps) which impacted operating results.

Non-GAAP operating income declined 16.0% from the year-ago quarter to $2.3 billion while margins declined 80 bps to 8.4%. Non-GAAP earnings per share were $1.7 billion or 86 cents compared with $2.0 billion or $1.00 in the prior-year quarter.

Balance Sheet and Cash Flow

The company ended the quarter with $13.3 billion in cash and cash equivalents versus $13.2 billion in the previous quarter. The company had a long-term debt balance of $17.1 billion, down from $19.9 billion in the previous quarter.

Hewlett-Packard generated $2.67 billion in cash from operations versus $3.56 billion in the previous quarter.

Guidance

For the fourth quarter, the company expects soft consumer demand in the PC industry to impact Personal systems. Moreover, pricing pressures in the personal systems, printing and servers are also expected to impact results.

Hewlett-Packard expects a tough year-on-year comparison of the Software segment in the upcoming quarter owing to the contract win from General Motors (GM - Analyst Report) in the year-ago period. However, improvement in execution and customer demand for Hewlett-Packard’s big data, security and cloud offerings are expected to remain solid.

For fiscal 2013, Hewlett-Packard estimates non-GAAP earnings per share in the range of $3.53 to $3.57 (previous estimate $3.50 to $3.60).

The company also hinted at a muted revenue growth in fiscal 2014 due to macroeconomic challenges.

Summary

Hewlett-Packard is one of the world’s largest computing and technology companies Results were impacted by macroeconomic factors and a massive decline in the PC business. Moreover, the company did not provide encouraging guidance. However, changes in management are expected to boost growth for the company.

Additionally, the company’s tractions in the cloud, security and big data segment are the positives, going forward. However, continuing macroeconomic challenges, tepid IT spending and competition from International Business Machines (IBM - Analyst Report) and Accenture plc are the headwinds, going forward.

Hewlett-Packard has a Zacks Rank #2 (Buy).

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